Financial Risks and More in Global Sourcing
This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.
Global sourcing holds the promise of higher profits through cost savings on nearly any product imaginable. But risks lie in nearly every stage of the sourcing process.
1. Financial Instability of Vendors and Intermediaries
One of the links in your sourcing chain (trading agent, stateside representative, or vendor) might accept your payment but doesn't deliver goods according to the purchase agreement.
Find a banking partner that facilitates international transactions, specifically import activities. Collaborate on methods of structuring agreements to protect your company's interests and assure timely, appropriate payment to vendors. Check business and bank references of intermediaries before starting the sourcing process; develop agreements that transfer title upon receipt of goods.
2. Inventory Overload
Your business orders a container load of products to save on per-unit production and shipping expenses. The sell-through is slow and the inventory ends up lasting more than a few years. As a result, you pay warehousing fees or take up valuable space in your warehouse to store inventory. And, cash that could have been invested in faster-moving items is tied up. Eventually, the product becomes obsolete and you sell excess inventory at cost or less.
To avoid inventory overload, place buys to maximize profits rather than minimize per-unit costs. Compare potential per-unit cost savings with inventory-carrying costs. Find vendors that accept relatively small orders with capabilities for short production runs.
3. Intellectual Property Violations
Getting a patent or trademark in the United States or your home country doesn't protect your intellectual property worldwide. Vendors often share ideas among their customers during factory visits and inspections. Your business will have no rights to recourse if your proprietary concept is accessed by competitors to create a new product design or promote an image that represents your brand in other countries.
To protect your ideas in the United States and outside its borders, engage legal counsel with intellectual-property expertise in all of the countries where your products will be made, marketed, and sold.
4. Off-Spec, Off-Quality Products
The shipment that your business receives doesn't match your specifications or quality standards. There are a multitude of reasons that finished products miss the mark: defective components, incorrect dimensions, shade variations, or lack of proper functional performance. Problems may originate from imprecise communications, cultural misunderstandings, slack controls, or inability of vendors to make products as specified.
Take a series of precautionary and follow-up steps to assure compliance with product requirements. Before placing an order, evaluate the vendor's overall quality and its systems for adhering to product standards. During the product-development phase, be thorough and, if possible, use visual images (photos, illustrations) and prototypes to convey specifications. Set up protocols that require testing and approval of components, colors, and samples prior to full production. Inspect shipments when received at your company's facility to verify compliance with all requirements for product design as well as labeling and packaging.
5. Late Delivery
The products are perfect but the shipment is late.
Verify that your vendor has the capacity and willingness to fill your order on time. Judge vendor claims relating to production volume and availability based on factors such as number of machines and employees on the production floor. Consider the priority of your business in the vendor's portfolio of customers.
Make sure that your company adheres to vendor timelines and lead times relating to materials availability, sample approvals, and order placement.
6. In-Transit Mishaps
Your shipment arrives on time but is compromised in some way: there are insects in the shipping container, some items are missing, or the product is damaged. Pinpointing the source of the problem is tricky but critical to getting remuneration from the vendor, steamship line, trucking line, etc.
Specify FOB Destination Freight Prepaid so that your business doesn't take title (and payment doesn't transfer) until the shipment arrives safely at your facility. In this way, vendor, agent, or intermediary controls freight and is accountable for product and shipment integrity.
Other options include: purchasing and sealing container loads of product so that shipments are inspected prior to overseas transfer; or hiring agents to inspect shipments at each stage of transportation. As a result, you can determine the timing and cause of any damage or pilferage.
7. Shipments Held by Customs
Your shipment is held at port awaiting customs clearance. In addition to shipment delays, your business incurs charges relating to container demurrage fees.
Engage a customs house broker to clear your shipments on time. Anticipate and address all shipment and product-specific issues according to guidelines, which includes providing ocean bills of lading and commercial invoices; assuring accurate country-of-origin labeling; and verifying results of product safety testing.
8. Long Lead Times
Your business would like to develop a new style or replenish its stock on a hot-selling fashion but lead times prevent quick action. Products that your business has ordered have fallen out of fashion before they've been received.
The reality of long lead times is hard to dodge so weigh potential for rewards with sourcing risks. Follow market trends worldwide and commit to being early with fashion-forward items. Order raw materials and book capacity with factories early to get faster-than-normal replenishment. Speed up timelines by air-freighting samples or even finished goods, depending on the product size and weight.
To mitigate risks overall, negotiate every detail of agreements with vendors — not only pricing but also full program compliance with delivery deadlines, product specifications, packaging, and more. Establish and enforce penalties for vendor failures so that your company reduces its financial risk associated with global sourcing. Encourage your vendor to communicate any problems as soon as possible so that your business can make adjustments quickly.
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